Time for a REAL Trading Lesson. You Don’t Know What’s Good For You!
Right, let’s cut the crap. It’s time for a REAL lesson and not another “you can do it” all hype and no substance article.
You will either do this and you WILL become a successful Trader or you won’t!
Do you want to succeed in forex? Yes or No? The choice is that simple! I’m going to tell you what the professionals do repeatedly to gain a deeper understanding of the market and they are better traders because they do it. It’s no secret, you have probably heard it before, but the fact is people just don’t do it. If you too want to make a real go of this forex gig and are actually ready to do the work, then this is for you.
Don’t waste your time in front of your charts, staring at candle sticks or scouring the internet for the next Holy Grail trade. What I’m about to explain to you IS the holy grail of trading. The 5% of traders who “make it” do this, the other 95% either brush over it or, are altogether too lazy to bother.
So let’s get into it:
A great man by the name of Aristotle once said “we are the sum total of our experiences”
So everything you do in life, the choices you make all boil down to past good or bad experiences you have had when interacting with the world around you. We also take advice from someone who has had the required experience in the area of focus and can guide you accordingly.
From an early age you subconsciously attach an emotion to those experiences to help serve you in the future. Example boy gets bitten by a dog > now as an adult is scared of dogs. The emotion of fear was triggered as a sort of self-preservation. Other emotions a based more on logic, like standing at the edge of a cliff. You know what will happen if you fall, again fear kicks in.
So what about forex? What have your experiences been in the market so far? What emotions are driving us and are they well founded?
In forex, traders are governed by two simple emotions when trading, fear and greed. That’s it. (…of course there are other ones that come into play as a consequence of winning or losing trades such as euphoria, confidence, regret, anger etc.) But before a trade is taken, both fear and greed are both pulling you in either direction, swaying your decision making process.
Together they can be tricky to keep in check and make the right decisions based on unbiased market analysis. Your analysis in turn is based on A. what you have is learned so far through experience in the market yourself or B. Guidance from someone else’s experience with books, videos , seminars, trading systems, strategies etc.
There is a problem here though. It arises when we attempt to trade a certain system or methodology we have learnt from another. (Most don’t discover pin bars, support & resistance, channels, trend lines etc. we are taught to look for them) These trading strategies may be sound and work just fine for the creator, because it is something he/she has discovered, drawing on their own experiences and formed a trade around it.
When you try to trade that same system, you are trying to trade it without the same experience to trade it as the creator. That may sound stupid, you are given an exact entry, management and exit criteria to follow, so why can’t you trade it? It’s the same reason why most people don’t follow the rules and stick to them. You don’t KNOW it works.
You may have been shown it works. You may have been taught the in’s and out’s and signals to look for, but you haven’t experienced it yourself. So now there is a conflict with your own personal experiences and specific interactions with the market and from the ones you have “learned” and are trying to trade.
The creator of the trading system may have the best intentions, but unless all aspects of that specific trade are internalized through process oriented interactions with specific aspects of the forex market you cannot trade it as was it was intended. What if you started trading it for the first time and you lost the first 6 trades. Do you continue? What is the max draw down period/ number of trades? Are you trading it right? Moved by fear you stop and the next 10 are winners? What then?
Most people will know the process highlighted above (process orientated market interactions) as back testing, but most won’t have done any or if they have not properly. The ones that do go on to become consistent traders by gaining a very deep understanding of price behaviors.
The will now not be governed by fear or greed because they have traded a particular system 1000’s of times before they go live, thus knowing what a drawdown period looks like and not feeling the need to change the methodology. They know what a winning streak looks like and they don’t get over confident and risk more, because they have experienced the random distribution of wins and losses of that particular edge, so they know that loosing trades are just around the corner to humble them.
The good news is we can gain the “creator level or experience” of any specific trading system by engage in process orientated experiences through back testing to internalize the processes specific to that system.
Lets break it down
What is experience?
Noun Experience is to encounter or undergo practical contact, observing facts and events, which leaves an impression on someone.
Where to start?
To start this process you need something to test. You can start with general or basic Price Action, such as pin bars or if you are currently trading a system and you want to understand it better you can back test that. Most people have a few strategies they are trading haphazardly, but the reality is you only need one good system on 1 currency pair to make hell of a good living in forex. Start with your best trade first, or the easiest one.
Back testing can be done in MT4 or you can use 3rd party programs like forex tester. I personally use MT4. By hitting the F12 button to scroll through the charts at your own pace.
How it’s done:
Let’s take a look at an example and just a few of the variables that make up a simple trade. Going through these exercises will having you understanding that particular trading system at a very deep level and allow you to refine it and Tailor it to your preferred trading style, risk appetite and most importantly you own psychological makeup.
Example: Daily pin bar reversal.
Primary variables to test:
How many occur in a 12 or 24 month period?
How often does price turn and head in the desired direction (the candle after the pin bar)
These are your 2 primary tests. How often does it occur and how often does it work? This will give you a basis for adding entry, management and exit variables to improve the either win loss ration or Risk reward ratio.
If you already have a fully functioning system go through and start testing all the parameters one by one and make logical deduction yourself on how well it works and how well it works for your particular trading style.
Other variable examples:
- Different time frames
- Time of day
- Does it work better buying or selling for that particular pair?
- Average stop
- Average Take Profit
- Where is Pin bar in relation to weekly/ daily pivots?
- What is MACD doing?
- Areas of support and resistance
- Different Currency pairs
- ADR- Does price exceed Average Daily range before reversing
- Do pin bars that are formed at ‘Round Figures’ (example; 1.700 or 0.9700) work better?
Surrounding price –
- Does price slow down, form a head/ base structure then a pin then reverse?
- Does a pin bar often follow a parabolic move in price?
Risk / Trade management
- 50% closed after ‘X’ amount of pips and rest left to run
- Move stop to BE after 1 x H4 bar in the desired direction
- 20% closed at ‘X’ amount of pips, 80% left to run
The list just goes on and on. After spending at least 2 weeks testing every variable you can think of, including trade set up and risk/management criteria you can think of, you will have a sample size in the 1000’s. You will be so familiar with the trade and you will have an amazingly optimized trading system.
The most important part is you would have internalized every aspect of the trade. You will be familiar with expected drawdown periods, win to loss ratio, risk to reward ratio based etc.
You will NOT be scared to pull the trigger on a trade.
You will NOT be fearful of price turning against you and bank profits too early.
You will NOT over expose yourself because you would have experienced the random distribution of wins and losses for your system or methodology.
You WILL now be trading like a professional trader
You WILL have a rock solid trading plan, you WILL stick to it.
You WILL bank consistent money.
Studying forex means you are a full time student. The learning process never stops. Continue to following this testing criteria and become process orientated by engaging in exercises on past data for every price behavior in the market.
Take your time, set aside 30 minutes, 2 hours, 6 hours whatever you can manage to do on a consistent basis. The way you behave in this testing phase will govern how you trade when live so take it seriously. After spending 12 – 24 months doing this there really will be no stopping you.